Commentary on Economics, Information and Human Action

Hotelling takedown

One of the classics of resource economics is Harold Hotelling’s “The economics of exhaustible resources,” Journal of Political Economy(1931). The article gave us what is now called “Hotelling’s rule,” which links resource prices and extraction rates for resources in finite supply. The article was simple, logical, and pathbreaking.

It also, by the way, appears to be not very significant to the world we actually live in according to a recently published article by Rob Hart and Daniel Spiro, “The elephant in Hotelling’s room,” Energy Policy (2011).

ABSTRACT: This paper questions the assumption, commonly used in theoretical and policy research, that scarcity rents make up a large proportion of market prices for oil and coal. We show that the empirical literature, simple calculations of historical and future scarcity rent shares, and possible theoretical explanations all imply the same overall conclusions: that scarcity rents seem to have been marginal or non-existent historically; that they almost certainly do not dominate fossil resource prices today; and that there will be other factors shaping the prices in the upcoming decades. We therefore argue that using the scarcity rent as the main or only basis for policy or for explaining empirical outcomes is ill-advised.